Coronavirus Response Update
Paul Dickson, Director of Research
April 1, 2020
As the Coronavirus (COVID-19) pandemic continues to develop, it is important to take stock of the countermeasures being implemented to limit its impact and restore global economic and social order. The Federal Government has taken fiscal and monetary measures to stimulate the economy during this unrest.
The Federal Government Passed the Families First Coronavirus Response Act
While most containment efforts had been conducted at state and local levels, a week ago Congress passed The Families First Coronavirus Response Act, addressing the pandemic and its impact. Though the bill contains some economic stimulus language and has expanded food assistance, many of the provisions are designed to allow the infected to stay home and slow the spread of the virus.
This new law requires small employers—companies with less than 500 employees—to provide paid-leave benefits to employees affected by COVID-19. At the same time, these employers are also given new tax credits and federal payroll tax relief to pay for the mandatory benefits. The bill includes:
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Mandatory Employee Paid Leave: A federal emergency paid leave benefits program will provide funds to employees taking unpaid leave due to the outbreak. It also allows employees to take up to 12 weeks of job-protected leave under the Family and Medical Leave Act to care for a child in the event schools are closed. The employer is required to pay at least two-thirds of their usual pay, up to a cap of $200 per day, or $10,000 total over the entire leave period.
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Tax Relief: A new tax credit will cover required payments to employees for time off as outlined above. This allows employers to collect a tax credit equal to 100% of payments to employees.
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Testing: This law also provides Coronavirus diagnostic testing at no cost to consumers, and temporary increases to the Medicaid Federal Medical Assistance Percentage (FMAP).
$2 Trillion Stimulus Package
On March 25 Congress reached an agreement on a $2 trillion stimulus package to address the economic impact of the pandemic. The key provisions, among others, are:
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A $500 billion fund to back loans and assistance to large companies, including $58 billion for loans and grants to US airlines, and more than $350 billion to aid small businesses. State and local governments can also benefit from these funds.
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A $100 billion boost for hospitals and other healthcare providers for equipment and supplies.
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Direct payments to lower- and middle-income Americans of $1,200 for each adult, as well as $500 for each child with payments starting as early as April 6.
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Unemployment insurance extension to four months, bolstered by $600 weekly. Eligibility would be expanded to cover more workers.
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After much debate, language was added to provide Congressional oversight over the lending programs as well as restrictions on companies using the money for stock buy-backs, limits on executive bonuses, and restrictions on businesses owned by members of Congress or the Executive branch on benefitting from the package.
This is a very large and aggressive effort and will cushion the economic impact of the pandemic, but it will do little to halt the spread of the virus. Economic conditions may worsen in the near term before a later improvement. Minimally the bill provides a safety net for many workers displaced by the virus and funds for companies to restart when the crisis is over.
Market Liquidity (The Fed)
As the pandemic threatened an economic crisis, financial markets went into a tailspin leading to disruption. Therefore, the Federal Reserve (Fed) took steps to address illiquidity in the market—caused by panic asset selling—and to improve economic conditions. First, the Fed lowered its short-term policy rate to zero and pledged $700 billion to a new round of bond buying (quantitative easing) to help lower longer-term rates. It also implemented two programs to deal with market disruption in which the Fed would purchase commercial paper and provide credit for banks to finance short-term maturities.
When it became clear that these moves were only having a modest impact on the financial market the Fed announced a second, much more aggressive set of policies. These include:
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An unlimited bond buying program of US Treasury and Mortgage Backed securities that will also include a broader universe of eligible Agency securities previously excluded.
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Up to $300 billion in financing to employers, consumers, and businesses. The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide an additional $30 billion.
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Establishment of two facilities to support credit to large employers and to provide liquidity for outstanding corporate bonds.
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Establishment of a third facility, the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.
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Facilitating the flow of credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility (CPFF) to include a wide range of securities.
The Fed’s actions are expected to normalize the bond markets which have been disrupted by the crisis. It is important to note that other central banks are also engaged. The Bank of Japan (BOJ) has increased its own purchases of financial assets. The European Central Bank (ECB) announced a “Pandemic Emergency Purchase Program,” that will spend EUR750 billion ($820 billion US) on a wide variety of fixed income assets on top of its existing quantitative easing program and may do more.
The Road Ahead
The status of the pandemic, as well as the response by fiscal, monetary and governance authorities remain in flux. While we often hear about “flattening the curve” to not overwhelm the healthcare systems, without additional measures, the virus will continue to spread. We have seen such measures work as China, South Korea and others have had great success in recovering following the pandemic in their countries. The fiscal and monetary actions reviewed above present an opportunity for recovery when the crisis is over.
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